Market pooh-poohs Putin'scredit rating firm; we're all at risk of becoming low-rate addicts; and banksare lukewarm on TLTROs.
Weare in danger of becoming addicted to low interest rates
TheBank of England cannot afford to wait long before raising interest rates,argues Andrew Sentance, who was a member of the bank's monetary policycommittee when it cut interest rates to the ultra-low level of 0.5% in March2009. Writing in The Daily Telegraph,Sentance says the usual argument for keeping rates where they are is that thereis no immediate need to raise them, that there are many global economicuncertainties, and that inflation remains subdued. But he sees four bigproblems with ultra-low rates: they penalize savers and undermine the notionthat saving is worthwhile; they encourage consumers to take on more debt; theyhelp push up house prices, hitting younger people; and they risk changingpeople's perceptions of low rates, meaning they may treat the current situationas the normal state of affairs. This last point alone could make it more riskyto raise rates, Sentence says, arguing that while there may be reasons fortemporarily delaying an increase in interest rates, the job of a central bankis to take a long-term view.
The Economist writes that despite enormousprofit margins and steadily rising levels of AUM, all is not well in the assetmanagement industry. Faced with competition from low-cost providers, the riseof index tracker funds and regulatory scrutiny, asset managers are finding itincreasingly difficult to justify the fees they levy for managing clients'funds —particularly given that the average fund manager struggles to outperform thewider market even before fees are taken into account. And when markets are flatto falling, as they were in 2015, clients become more keenly aware of the asseterosion attributable to fees. Those managers failing to deliver market-beatingreturns therefore face difficult times ahead.
VladimirPutin Starts His Own Ratings Firm
Russiahas a new rating agency, but international market observers are unimpressed,according to Bloomberg News. The launch of Analytical Credit Rating Agency, orACRA, was announced in July 2015, after Moody's and Standard & Poor'sRatings Services downgraded Russia to junk. The government also imposed newrules on agencies providing national-scale ratings in Russia, prompting Moody'sto cease offering them. Meanwhile, Fitch Ratings said it is likely to stopissuing ratings on Russian companies for fear of falling foul of internationalsanctions. But Paul McNamara, a London-based money manager at GAM UK, calledthe launch a "standard response to being downgraded. Nobody in the marketcares."
S&PRatings Services and S&P Global Market Intelligence are owned by McGrawHill Financial Inc.
BanksSay No to Funds from Flagship ECB Policy
TheECB on March 10 announced a fresh round of targeted longer-term refinancingoperations that will begin in June, but a study by The Wall Street Journal suggests the move will provide scantrelief to the banking sector. The seventh round of TLTRO was launched on March24 and saw the lowest take-up since it began in September 2014. The secondround, in December 2014, saw banks take up €130 billion as they sought to gaincheap liquidity in exchange for lending to the real economy. But even this wasfar short of the €400 billion cap. By March 2016, the figure had slid to just€7.3 billion — and only 19 out of 300 eligible banks took part. Most analystsbelieve the new TLTRO funds will be used mainly to roll over old TLTROs.